European stocks rise as US soft landing hopes boost risk assets

Infograph: TBS

European stocks rose on Monday as comments from Treasury Secretary Janet Yellen raised hopes that the US economy is headed toward a soft landing. 

The Stoxx 600 Index gained 0.4% in London, led higher by miners which got a lift from rising metals prices, while other cyclical sectors such as banks and insurers also rose. Equities got a boost after Yellen said she's increasingly confident that the US will be able to contain inflation without major damage to the job market.

Italian banks were among the top gainers among lenders following a newspaper report that the government is considering changes to a controversial windfall tax on lenders. Elsewhere, Vistry Group Plc was standout, soaring after saying that it plans to focus solely on building homes for affordable housing providers as private sales struggle. Covestro AG rose after the German chemicals maker said its management board decided to enter talks over a potential takeover by Abu Dhabi National Oil Co.

The region's stocks have seen a testing start to the month as worries over higher interest rates have dented risk appetite, and luxury firms have come under pressure from worries over a slowdown in China. The gauge is down slightly in September, though remains 7.4% higher on the year.

"In Europe, there is no real growth driver at the moment," Arnaud Girod, head of economics and cross-asset strategy at Kepler Cheuvreux, said by phone. "No one wants to be in Europe right now, but a large stimulus in China could be a game changer."

Deutsche Bank strategists said that the current pullback in equities is typical of bull markets, while a further drop wouldn't be surprising.

Investors have their eyes on upcoming US inflation data as well as the European Central Bank's interest rate decision, due on Thursday, and whether this time will be the final hike as part of policymakers' battle to tame inflation. Last week's report showing that the euro-area economy barely grew in the second quarter has raised worries over the risk of stagflation setting in.

With the economy at the forefront of investors' minds, Susana Cruz, a strategist at Liberum Capital, said that she doesn't see major drivers for an equity rally.

"Although we still see some upside for stocks in 4Q, as inflation continues to ease and yields fall, this outperformance will fade soon as the UK and the Eurozone deal with the recession and markets assess the poor earnings outlook," Liberum's Cruz said.